Is Your Contracting Business Running Out of Fuel?
CashFlow is the Fuel That Keeps Your Business Running
For contractors, the idea of cash flow management can seem overwhelming. But with the right strategies, you can ensure that your business has the necessary funds to cover expenses and remain profitable. With Profit First, you can learn how to manage your cash flow so that you always have the right amount of cash in the right place, at the right time.
In this blog post, we’ll take a closer look at how Profit First can help contractors make sure their businesses stay solvent and profitable.
Understanding Cash Flow Management for Contractors and Specialty Trades
Cash flow management is the process of tracking, budgeting, forecasting, and controlling the money that comes into and out of a business. For contractors, cash flow management is essential to ensure that there’s enough money in the business to cover subcontractors, payroll, overhead expenses, taxes, and other obligations. It’s important to keep an eye on cash flow because it can have a major impact on your bottom line.
The Basics of Cash Flow Management: What it is, why it’s important, and how to get started
At its core, cash flow management involves tracking all cash inflows and outflows related to your business. This includes not only payments from clients—such as retainers or invoices—but also cash disbursements. You should also monitor any accounts payable you need to pay to subcontractors, material vendors, salaries, and other overheads such as taxes or utilities. The idea is to develop a systemic process that accounts for both income and expenses so that you can determine how much money your business has available at any given time.
When managing cash flow, you should always look ahead and plan for future needs. This requires forecasting how much cash should be available, and when so that you can anticipate any potential shortfalls or surpluses in advance.
Managing Your Contractor Income:
Is it possible to have a strategy for maximizing your earnings potential through pricing strategies and balancing your portfolio with multiple clients/projects? Why yes, it is!!
As a contractor, one key element of cash flow management is ensuring that you are getting paid what you are worth for the services you provide. To maximize your earnings potential while still staying competitive in the marketplace, consider utilizing different pricing models such as retainer agreements or fixed-price contracts. Additionally, seeking out ideal clients who offer fair rates can help balance out fluctuations in income levels while reducing burnout from working too much on one project at once. Staying in your lane (working with your ideal client) will help you avoid taking on projects that will tax your resources and skills. One of the biggest problems we see with our clients occurs when they take on a project with a client that is difficult to work with, or where the communication is challenging. It’s also a good idea to develop specialty niches and get really good at specific kinds of work that can be efficiently completed with high quality.
Controlling Expenses in Contracting Businesses: Tips for keeping operating costs low while still delivering quality services
One way to effectively manage cash flow is by monitoring all expenses and processes associated with the work. To keep costs as low as possible without sacrificing quality service delivery, look for ways to streamline operations wherever possible such as using virtual assistants or online marketing tools instead of hiring full-time employees. Additionally, negotiate better terms with suppliers when possible by taking advantage of consolidating your business with them across many projects.
Here are a few more things to consider:
- Use Purchase Orders on all your projects to secure bid prices with the subcontractors
- Be clear about deadlines to submit invoices so you can be crisp on your own progress billings
- Agree on payment terms with subcontractors (specifically, let them know when they will be paid)
- Communicate clearly and timely when work is not completed and you will not be paying the entire invoice that was submitted
Here’s Your Tactical Cash management System:
Make sure your cash received is put into several different buckets. That way you’ll be certain to have the right amount of cash available when needed. We recommend the following cash accounts:
- Profit First Account: Every business MUST be profitable. It makes no sense to own a business that is losing money. So it’s critical that your business is structured to ALWAYS be profitable. Yes, that takes a little planning, but this really does make a huge difference in owner satisfaction. After all, why would you invest your time and money into a business that is not profitable?
- Sales Tax Account: If you are required to charge sales tax then you should have a separate account for your tax payments.
- Materials, Supplies, and Subcontractors Account. Don’t spend the money that doesn’t belong to you. Take the client funds received and move the funds required to pay out to a separate account. That way when the bills come due, the funds will already be there to pay them.
- Owners Pay Account. You’re working in the business, so you deserve to get a salary just like your other employees. This is an often neglected area in many contracting businesses. It’s also critical to receive a “reasonable salary” for certain income tax elections made that will save you significant taxes later.
- Tax Account: When it comes time to pay taxes, stop scrambling! If you discipline yourself to put a modest amount of money into a tax account, then the funds will be there when it comes time to pay THE MAN!!
- Operating Expense Account: Last (but not least), setting aside funds to cover your overhead makes sure you are able to operate efficiently, and cover the monthly expenses as they come due. It also forces fiscal discipline to manage your expenses and not spend on frivolous unnecessary things. Before spending money on anything, always ask yourself if this expenditure will either help “make money” or “save money.”
Ok, Did We Overwhelm You? Need More Fuel for your business?
We have the unique ability to help you quickly and painlessly sort through all these issues and make a plan to implement these ideas. Call, or fill in the inquiry form below and we’ll get in touch with you right away to get started…